The new defence secretary, who has a reputation for being uncompromising on departmental budgets, underlined the importance of balancing the books as well as defending the country.

"If we don't reshape now we won't be in a position to order new equipment in the future," he said.

"Our challenge is to move from the fantasy budgets of the past to firm foundations for the future. This is a transition that is essential to the future of defence - but no-one should be under any illusion that it will be easy or pain-free."

Mr Hammond appeared confident he will secure the planned annual one per cent increase in the MoD's budget after the 2015 general election - despite chancellor George Osborne announcing the Treasury plans to extend its austerity drive until 2017.

He confirmed the final cost of Britain's involvement in the international military campaign against fallen Libyan renegade leader Muammar Gaddafi cost £212 million - down from the £260 million estimate Mr Osborne offered earlier this year.

The defence secretary also highlighted problems faced by the struggle against the Taliban in Afghanistan by referring to Tuesday's sectarian suicide bombing in Kabul, which left 56 people dead.

The attacks have opened a "new front" in the unstable country", Mr Hammond warned.